One of the longest bull markets in history is raging on as the S&P 500 has reached an all-time high at the time of writing.
At the same, time the US 10 year treasury yields have reached an all-time low.
With yields at their lowest point and US stocks at their highest, investors have been looking at ways of diversifying their portfolios and embracing opportunities in alternative markets.
One such alternative market is Japan. More and more investors are now –depending on their age– revisiting the idea of investing in Japan or considering it for the first time.
Why Japan?
A Big Base and Good Value
The Tokyo Stock Exchange (TSE) is Asia’s largest exchange by market capitalization, and is one of the largest in the world. There are more than 3,700 companies listed on the TSE with a combined market cap greater than $ 5.6 trillion (as of December 2020).
The average Price to Earning Ratio (P/E ratio) of Japanese stocks is around 14, lower than the 18 in the US, signalling that Japanese stocks are better value for the same amount of earnings (source).
Nobody knows Japan’s ills better than the Japanese themselves
Western commentators often exult in pointing out Japan’s woes as though they have figured out something that the Japanese themselves know nothing about.
It is true that Japan’s population is ageing fast. This is happening by a decline in birth rate and an increase in longevity (which increases the share of older workers in the population).
A study by economists Shigeru Fujita and Ippei Fujiwara, found that there is a causal link between an aging of the working-age population and deflation in the country. As the share of older workers increased, the decline in birth rate eventually reduced the entry into the labor force of younger workers, leading to a reduction of the labor force — deflation followed.
Yet the Japanese have been aware of this trend from the start, and policy makers have been working hard –with varying degrees of success– to find remedies. Despite popular opinion, immigration into Japan has been increasing to fill the gap.
Japan has built itself back gradually
Despite having a very large market cap size, TSE experienced a dramatic drop (from 1991 to 2001) as the Japanese economy contracted after the country’s equity and real estate bubbles burst. Japanese economy struggled with a recessionary environment and the Nikkei plunged in value.
Nearly three decades after the bubble burst in 1991, Japan is still characterized as weighed down by mounting debts, economically stagnant, and increasingly long-lived retirees, but its businesses have been growing steadily and government policy has been adapting to the country’s economic situation.
Recent trends
Below we can see the performance of the Nikkei 225 since crazy times of the lates 1980’s.
Markets have reacted to the new policies and the Japanese economy began to experience an uptick in growth since 2013 when Japanese Prime Minister Shinzo Abe revived the country’s economy with various initiatives that were considered courageous in the world of Japanese politics.
The world recognizes these policies as Shinzo Abe’s “Three Arrows” economic revitalization agenda, dubbed “Abenomics”.
The first arrow is aggressive monetary policy through depreciation of Yen and quantitative easing (QE) policies. The second arrow is a “flexible” fiscal policy in the form of boosting consumption with a target of achieving economic growth of up to 2 percent. And the third arrow is structural reforms to increase Japan’s competitiveness.
The growth of the Japanese economy has, of course, an impact on the growth of the stock market in Japan. The Japanese market is now a more attractive place to invest. Political stability, stringent corporate governance and low valuations are also positive factors.
A Resilient Economy
Japan displayed extraordinary resilience in its fight against Covid-19. It did so by completely ignoring the default playbook for dealing with the pandemic.
From the get go, no strict restrictions were placed on residents’ movements, many businesses stayed open, no high tech apps were used for tracking people’s movements and Japan did comparatively little testing. Dispute this, Japan’s curve has flattened and it has now begun the recovery process for its economy. It seems reasonable to think that Japan’s culture of minimal physical contact (no handshaking etc.) and habitual mask wearing has played a big part.
Like all markets across the world, the Nikkei sunk dramatically in March 2020, but soon bounced back. Japan’s GDP grew an annualized real 21.4% in the quarter ending September 2020, expanding at its fastest since 1968, helped by government stimulus that fuelled a sharp jump in consumer spending and a strong rise in trade.
Although Japan is currently facing the prospect of a second wave and it is suspected that its economic growth might slow, the resilient nature of its economy ensures that any recovery that will occur in Japan will be swift and sharp and it won’t take much time for it to recover its previous high.
According to Japan’s Economy minister Mr. Yasutoshi Nishimura, people in Japan are still in a defensive mindset which will mean the recovery will be a slow and steady process. The Japanese government has signalled its commitment to economic recovery, even at the cost of increasing national debt as the Bank of Japan has responded by buying more equity funds and flooding the banking sector with cheap loans.
Japan has been buying business all over the world for decades
Over the years, many Japanese companies have been buying businesses all over the world, including emerging markets. Japanese companies made a record number of acquisitions in 2019 as corporate restructuring raced ahead. Quoted from Nikkei Asia, domestic acquisitions rose to 3,000 from 2,814 in 2018, while overseas deals climbed to 826 from 777, according to Tokyo-based research company Recof. Both were record highs.
Although in 2019 the value of overseas deals decreased to 10 trillion yen, the value of overseas deals in the previous reached more than 18 trillion yen. It is clear that Japanese companies feel the need to pursue growth by looking outward.
The Eyes of the World are Back on Japan
With Japan having seemingly recovered gradually from its lost decade (actually around two lost decades), investors have been turning once again to the land of the rising yen.
Most notably, Warren Buffett made the headlines in 2020 as Berkshire Hathaway invested USD $6 billion in Japanese Equity.
The billionaire chairman and CEO of Berkshire Hathaway announced that his company has taken a 5% stake in Mitsubishi Corp., Itochu Corp., Marubeni Corp., Mitsui & Co. and Sumitomo Corp. Citing data from CNBC, Berkshire’s plan is to keep the stakes — which equate to a roughly $6 billion bet on Japan’s energy, food, metal and textile importers — as long-term plays with the possibility of increasing each one to as much as 9.9%.
Buffet said he was pleased that Berkshire Hathaway participated in the future of Japan and the five companies they have chosen for investment. “The five major trading companies have many joint ventures around the world and most likely have more partnerships. I hope in the future there may be mutually beneficial opportunities”, said Buffet, and this echos what we said earlier about Japanese the fact that Japanese companies have been buying business all over the world for years. Put simply, when you buy into Japan, you are also buying the world, including emerging markets.
With the US and China embroiled in a trade war and the EU involved in a messy divorce with the UK, it’s no wonder that more and more people are seeing Japan as a safe place to put their money.
Check out our article on how to buy Japanese stocks for more information.